Lumen Technologies, Inc. — Q2 2023 Form 10-Q
Business context and reporting period
Quarter ended June 30, 2023; comparisons are with the quarter and six months ended June 30, 2022. Lumen provides communications and network services through its Business and Mass Markets segments. Results include the Latin American and ILEC operations only until their 2022 divestitures. The EMEA business remained in continuing operations and was classified as held for sale.
Financial performance and liquidity
- Revenue: Q2 revenue was $3.661 billion, down 21% year over year; first-half revenue was $7.399 billion, down 20%. The 2022 divestitures accounted for $707 million of the Q2 decline and $1.4 billion of the first-half decline. Continuing business also faced pressure, especially in legacy offerings.
- Profit: Q2 net loss was $8.736 billion ($8.88 per diluted share), versus net income of $344 million ($0.34 per share) a year earlier. First-half net loss was $8.225 billion ($8.37 per diluted share), versus net income of $943 million ($0.93 per share). The losses chiefly reflect an $8.793 billion non-cash, non-deductible goodwill impairment.
- Operating performance: Q2 adjusted EBITDA was $1.127 billion, compared with $1.764 billion; first-half adjusted EBITDA was $2.264 billion, compared with $3.678 billion. Business segment adjusted EBITDA margins were 64% in Q2 and 63% in the first half, versus 66% in each prior-year period. Mass Markets margins were 54% and 55%, versus 62% and 64%. Segment revenue and EBITDA comparisons are affected by the divestitures.
- Cash flow and investment: First-half operating cash flow was $495 million, down from $2.771 billion. Capital expenditures were $1.436 billion, so operating cash flow less capital expenditures was negative $941 million. Cash used in investing activities was $1.405 billion.
- Debt and liquidity: Total debt carrying value was $20.053 billion, including $154 million of current maturities; cash and cash equivalents were $411 million on the balance sheet. Management reported $457 million including $46 million classified as held for sale, and $2.0 billion of available revolver capacity. Debt principal was approximately $11.4 billion secured and $8.5 billion unsecured. The company reported compliance with material debt covenants at quarter-end.
- Other metrics: Interest expense was $294 million in Q2 and $573 million in the first half. The company had approximately $8.0 billion of unhedged floating-rate debt; a 100-basis-point SOFR increase would reduce annual pretax earnings by approximately $80 million. Stockholders’ equity fell to $2.284 billion from $10.437 billion at year-end 2022, primarily reflecting the impairment and first-half loss.
Material changes versus the prior comparable period
- Mass Markets revenue fell 36% in Q2 and 37% in the first half; much of the decrease reflects the ILEC sale. Fiber Broadband revenue nevertheless grew 4% in both periods, while copper-based Other Broadband and Voice and Other declined sharply.
- Business revenue fell 15% in Q2 and 14% in the first half. Grow category revenue declined 5%, but continuing growth in IP, dark fiber, wavelengths and colocation partly offset divestiture effects and declines in mature services.
- Q2 goodwill impairment reduced goodwill by $8.793 billion. A further $90 million first-half loss on the EMEA disposal group was recorded, including $13 million in Q2.
- First-half debt exchange offers and a note repurchase reduced consolidated debt principal by approximately $630 million and generated a $618 million accounting gain. New secured notes carry a 10.5% coupon.
- First-half cash flow included approximately $1.3 billion in income taxes paid, mostly related to 2022 divestitures. The company paid no common dividends in the first half, versus $525 million in the prior-year period.
Outlook, management commentary, risks and unusual items
- Management projected full-year 2023 capital expenditures of approximately $2.9 billion to $3.1 billion. The filing provides no specific earnings or revenue guidance.
- Lumen expected the $1.8 billion EMEA sale to close in late 2023, subject to regulatory approvals and customary conditions. Proceeds remain subject to purchase-price adjustments; net after-tax proceeds could vary. The company recorded a $67 million loss from donating its Monroe, Louisiana campus and leasing back part of it, and expects further real-estate rationalization costs.
- Management estimated 2023 cash federal income tax liability of $300 million to $400 million, excluding the substantial tax impact from 2022 divestitures. It expected no required or voluntary contribution to the Combined Pension Plan in 2023 and estimated $210 million of 2023 post-retirement benefit payments.
- Management cited competition, declining legacy service demand, inflation, lower revenue, divestiture-related dis-synergies, fiber construction labor costs and execution risks for Quantum Fiber buildouts. It warned that further deterioration in market capitalization or assumptions could lead to additional goodwill impairments.
- On July 25, 2023, the company received a letter from representatives of certain debt holders alleging a potential Level 3 default related to Latin American divestiture proceeds and requesting a meeting. Lumen said it did not believe a default had occurred; no notice of default had been delivered as of the filing. Potential acceleration or enforcement actions could materially affect liquidity and operations.
- Other risks include litigation and regulatory matters; the company had accrued $83 million for litigation and non-income-tax contingencies but could not estimate reasonably possible losses beyond that accrual. New risk disclosures addressed allegations concerning lead-sheathed legacy cables and the potential debt-default claim.
Important facts for investors to verify
- Whether the EMEA transaction closes on schedule and the final net proceeds after adjustments, taxes and any further disposal losses.
- Cash generation, debt maturities and refinancing access, especially given high leverage, $8.0 billion of unhedged floating-rate debt and low reported cash.
- Whether the alleged debt-covenant issue escalates into a notice of default, acceleration claim or litigation.
- Revenue and subscriber trends in continuing operations, including Quantum Fiber growth versus ongoing copper, voice and Business legacy declines.
- The assumptions underlying the $8.793 billion goodwill impairment and the risk of additional impairment or other charges.
- Actual capital spending, taxes and operating cash flow relative to management’s projections and the negative first-half cash flow after capital expenditures.